Questions raised whether America is undergoing a wage-price spiral

There has been an unexpected jump in United States (US) wages, leading to concerns about rising inflation.

Financial markets are worried that the rising wages in America will result in sustained higher inflation given that consumer prices are rising quickly, as the economy reopens after the pandemic. Bloomberg is reporting today that a closely watched data release tomorrow is expected to show prices rose another 0.4 per cent in May, pushing annual inflation above April’s 4.2 per cent, already the highest in more than a decade.

The business magazine says many policymakers and economists see the price spike as temporary, partly because they haven’t been anticipating much in the way of wage growth, which has been relatively stagnant for years at the lower end of the pay scale. However, employment is still way down from pre-pandemic levels, suggesting an ample pool of workers from which to draw and most jobs being created right now are in low-wage industries like restaurants and tourism.

LABOUR MARKETS UNDERGOING LASTING CHANGE

Meanwhile, companies that are raising base pay are signaling that “they perceive a longer-term challenge to attracting workers that couldn’t be solved just by offering one-time bonuses,” said Daniel Zhao, senior economist at Glassdoor Inc.

On that view, labour markets are undergoing lasting change rather than hiccups on the way back to their pre-pandemic state – which could mean wage increases, and whatever inflation risks they bring, are sustained for longer.

Last week’s jobs report showed a larger-than-forecast pickup in average hourly wages for a second straight month. It turns out that whatever the unemployment numbers say, there’s a shortage of people ready to work at the going rate of compensation – prompting many employers to boost pay or offer bonuses in order to staff up.

WAGE-PRICE SPIRAL CONCERNS

As a result, some analysts have posited the argument that America might be exhibiting the prospect of what is known and dreaded in economics as a wage-price spiral. The idea is that higher wages spur more spending growth that strains production capacity and drives up business costs. In turn, companies raise prices and workers demand even larger pay increases to stay ahead of a rising cost of living.

Those dynamics contributed to persistently high US inflation in the 1970s, a period often invoked by those who fear a lasting wave of post-COVID inflation. Bloomberg reports that Federal Reserve officials are not buying into that argument.

However, they have acknowledged that pandemic policies like stimulus checks and enhanced unemployment benefits could push wages up, noting that last week firms are boosting starting pay.

The Fed officials say the increases are concentrated in lower-paid service industries, where faster wage growth is exactly what they and the Biden administration want to see and haven’t spread up through the pay scale. More broadly, Fed Chair Jerome Powell has repeatedly argued that the once-close link between wages and inflation has broken down in recent years.

JOB GROWTH ACROSS AMERICA

Across the US, job openings grew to a record-high 9.3 million in April, and some analysts say that’s increased workers’ bargaining power. Other economists cite entrenched trends like declining union membership, and argue that they leave workers lacking the clout to make the pay increases stick in the longer term.

It will likely take many months of data to settle the argument, partly because the numbers coming in right now are still skewed by pandemic distortions that will take time to fade away. A recent study by the Economic Policy Institute highlighted another factor that’s driving wages up such as more tipping at restaurants and bars, as customers return.

However, it has been argued by Josh Bivens, EPI’s director of research that if this is a large contributor to wage increases, then pressures should ease once restaurants reach full capacity. According to him, “so long as the industries that are seeing the really rapid wage growth are also the ones seeing really rapid employment growth, that actually doesn’t strike me as a shortage… . That strikes me as how economies adjust to a big increase in demand”.